Educational Articles

From the Survey: GameStop

Joel Schwed
| February 09, 2013

GameStop (GME) is the world’s largest video game retailer. The company has built its dominant market share over the years on the strength of its trade/buy business model. The unique proposition of trading in used games, along with a consistently robust inventory of used games available for purchase, has helped establish GameStop as the number one retail source for video-game consumers. The strong market share has helped the company maintain relatively decent performance over the past couple of years, despite a challenging industry environment. Although sales fell approximately 10% through the first nine months of fiscal 2012 (year ends February 2, 2013), its results were significantly better than the overall industry. Moreover, the company has been able to improve margins, thanks to growth in more-profitable segments. Indeed, earnings per share likely improved by about 10% in fiscal 2012.

Investors seem to have mixed feelings regarding GME and the video game industry outlook. On the one hand, the industry weakness over the past couple of years can be attributed to the prolonged end to the current console cycle. Yet, many investors appear to believe that the core video game business is in more of an underlying secular decline. This sentiment has been evident in the consistently low interest for shares of GME, and in the overall downward pressure on the stock over the past few years. The ongoing shift to digital downloads and streaming/mobile games has been a major focus of investors. Yet, GameStop has been very proactive with increasing its exposure to these segments via acquisitions over the past couple of years.

The company expanded into the online game business with the acquisition of Kongregate in 2010. The Kongregate.com website offers over 50,000 free-to-play video games and attracts over 15 million unique visitors each month. The business earns revenues from advertisements and in-game player transactions. GameStop followed up this acquisition with the purchases of Spawn Labs, a cloud-based streaming technology company, and Impulse in 2011. The Impulse acquisition has provided GameStop with a PC digital download distribution platform. Impulse has been integrated into the revamped Gamestop.com web site. The combination of these digital video game assets has helped GameStop establish a rapidly expanding, multi-channel digital business.

Digital sales surged 57% in 2011, and likely increased 35%-40% in fiscal 2012. The segment has received a boost from an increased mix of downloadable content (DLC) connected to top-selling “physical” games. GameStop has rolled out DLC kiosks in its stores, as part of a process to integrate the digital and traditional software businesses. In addition, the company recently created a mobile device business focused on trade-ins and resale of all Apple (AAPL) mobile devices (iPods, iPhones, and iPads). This mobile operation was on track to generate $150 million-$200 million in sales in fiscal 2012, and accelerate to $550 million- $600 million by 2014. Notably, the business has strong margins, which is also the case across all of GME’s digital segments. The digital/mobile business should maintain a robust pace of growth over the next few years, and make increasing contributions to both the top- and bottom-line.

Another positive for GameStop is the strength of its PowerUp Rewards Program. The membership base has rapidly expanded over the past few years, exceeding 21 million members as of November, 2012. Importantly, these customers are much more engaged than non-members, accounting for nearly 75% of sales in the third quarter of fiscal 2012. The vast amount of customer data from the PowerUp program is an important asset, providing GME with detailed customer segmentation information, and improved targeted marketing. Moreover, the success of the program appears to have supported video game sales.

The near-term outlook remains challenging for the video game retail segment, and there is limited visibility on the future structure of the industry, with the ongoing shift to multiple forms of digital games. Yet, GameStop has improved its position for the long term, with a multi-channel approach, and increasing exposure to various digital formats. For more information in regard to GameStop’s prospects, as well as the particular investment merits of the stock, subscribers are encouraged to check out our full report in The Value Line Investment Survery.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.